Going global? Not without these tips.
As companies focus on international expansion, the pros and cons of various business structures come into play says Aron Govil. One common structure is an S Corporation (S Corp). An S Corp allows U.S.-based businesses to become “international ready” by allowing them to transition at their own pace toward becoming a global business.
The Pros of Using an S Corp to Go Global
An S Corp is a good way for companies to earn revenues, as opposed to merely licensing intangible property or collecting fees. In contrast to a C Corp that issues stock, the owner’s interest in an S Corp is represent by a reasonable salary and distributions from profits. That makes it easier for owners of U.S.-based businesses to use their business as a vehicle for international expansion without being unduly taxed on non-U.S. source income from those ventures or risking loss of control over corporate policy due to new stockholders who want a say in how the company is run.
Another advantage of using an S Corp when expanding overseas is that as the U.S.-based entity, it will have a relatively easy time setting up an offshore subsidiary to purchase licenses or other intangibles from non-U.S. sellers and still be able to deduct all expenses associated with those transactions under Internal Revenue Code (IRC) Section 162(a). And unlike a C Corp, any transfer pricing those results must be at arm’s length and documented under the closely monitored safe harbor rules of IRC section 482.
The Cons of Using an S Corp When Expanding Overseas
The primary disadvantage of using an S Corp when expanding overseas is the same as its advantage: you cannot sell your shares in order to fund international expansion (or even to distribute cash back) without negative tax consequences explains Aron Govil. After all, that’s why an LLC or a C Corp is usually the business structure of choice when a company is expanding overseas–those business entities can easily distribute cash back to the U.S. owners without generating any additional tax liabilities here at home on non-U.S.-source income from those ventures under IRC Section 902 and Section 904(a).
The other primary drawback of using an S Corp to expand internationally stems from IRC Section 1363(d). Which requires shareholders of more than one class of stock in an S Corp to make complex valuation elections before qualifying for Subchapter S status. Including valuations on opening and closing dates as well as dates with respect to interim ownership changes. Failure to make those elections can result in termination of S Corp status. Causing a company that has not otherwise engaged in C Corp reorganization. To be subject to U.S. tax on all income from foreign subsidiaries. As a C Corp after it loses its Subchapter S status.
What the Pros and Cons Mean for You
The pros and cons outlined above mean that companies who want to expand internationally. Using an S Corp should evaluate which combination of pros and cons makes more sense. For their business structure goals, given their particular situation. If using an LLC or a C Corp does not meet your needs or would present international expansion obstacles. You don’t want to have to overcome, then an S Corp is probably the right choice for you. If you’re ready to expand overseas. Just remember that international expansion usually means having to make complex decisions. About the legal structure of your company, tax election timing (when to make them and when not to). And long-term plans for how you intend to manage your business internationally says Aron Govil.
Conclusion:
S Corp is a good way for companies to earn revenues. As opposed to merely licensing intangible property or collecting fees. In contrast to a C Corp that issues stock. The owner’s interest in an S Corp is represent by a reasonable salary and distributions from profits.